IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH ...

Case: 12-20648 Document: 00512360374 Page: 1 Date Filed: 09/03/2013

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals Fifth Circuit

F I L E D

September 3, 2013

No. 12-20648

Lyle W. Cayce Clerk

LONE STAR NATIONAL BANK, N.A.; AMALGAMATED BANK; FIRST BANKERS TRUST COMPANY, NATIONAL ASSOCIATION; PENNSYLVANIA STATE EMPLOYEES CREDIT UNION; ELEVATIONS CREDIT UNION; O BEE CREDIT UNION; SEABOARD FEDERAL CREDIT UNION

Plaintiffs ? Appellants v.

HEARTLAND PAYMENT SYSTEMS, INC.,

Defendant ? Appellee

Appeal from the United States District Court for the Southern District of Texas

Before SMITH, GARZA, and SOUTHWICK, Circuit Judges. EMILIO M. GARZA, Circuit Judge:

This case arises out of a group of hackers' breach of Heartland Payment Systems, Inc.'s ("Heartland's") data systems, compromising confidential information belonging to customers of the plaintiff banks (together, the "Issuer Banks"). The district court dismissed the Issuer Banks' claims. The Issuer Banks appeal only the dismissal of their negligence claim. We REVERSE and REMAND for proceedings consistent with this opinion.

Case: 12-20648 Document: 00512360374 Page: 2 Date Filed: 09/03/2013

No. 12-20648 I

The Issuer Banks have contracts with Visa and MasterCard that allow them to issue payment cards, including both credit and debit cards, to their customers. When a customer uses one of these cards at a merchant, the card information is first sent to a bank with whom the merchant contracts, known as the "acquirer bank." The acquirer bank then sends the information to a processor, such as Heartland, and the processor sends the information to the issuer bank that issued the card. The approval or disapproval of use of the card is then transmitted back to the merchant through this chain.

Two acquirer banks, KeyBank and Heartland Bank (together, the "Acquirer Banks"), are members of the Visa and MasterCard networks. Heartland contracted with the Acquirer Banks to process their transactions. These contracts required Heartland to comply with the Visa and MasterCard regulations, which contain mechanisms for Visa and MasterCard network members to recoup losses in the event of a data breach.

Such a data breach occurred when hackers infiltrated Heartland's data systems and stole payment card information. As a result, the Issuer Banks allege they incurred costs associated with replacing the compromised cards and reimbursing customers for fraudulent charges. Lacking a written contract with Heartland, the Issuer Banks asserted various claims, including negligence and contract claims as third party beneficiaries of Heartland's contracts with other entities.

As to the negligence claim, the parties disputed whether Texas or New Jersey law governs. They agreed the economic loss doctrine under Texas law would bar the Issuer Banks' negligence claim, but disputed the applicability of

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No. 12-20648 the economic loss doctrine under New Jersey law. The district court dismissed all the Issuer Banks' claims, holding that even under New Jersey law, the economic loss doctrine would bar the Issuer Banks' negligence claim. The district court reasoned that by entering into the web of contractual relationships established by Visa and MasterCard, the Issuer Banks contracted for the specific remedies afforded by the Visa and MasterCard regulations and thus could not bring common law tort claims against another participant in the same web.

The Issuer Banks timely appealed the district court's dismissal of their negligence claim against Heartland.

II We review motions to dismiss under Federal Rule of Civil Procedure 12(b)(6) de novo, "accepting all well-pleaded facts as true and viewing those facts in the light most favorable to the plaintiff." Highland Capital Mgmt., L.P. v. Bank of Am., Nat'l Ass'n, 698 F.3d 202, 205 (5th Cir. 2012) (quoting Bustos v. Martini Club Inc., 599 F.3d 458, 461 (5th Cir. 2010)). The well-pleaded facts must state a claim that is plausible on its face, and "[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 205 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)). The Issuer Banks assert that under New Jersey law, the economic loss doctrine does not bar their negligence claim. We agree. The economic loss doctrine generally limits a plaintiff seeking to recover purely economic losses, such as lost profits, to contractual remedies. See generally Spring Motors Distribs., Inc. v. Ford Motor Co., 489 A.2d 660, 671?72 (N.J. 1985). The New Jersey Supreme Court explained:

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No. 12-20648

Generally speaking, tort principles, such as negligence, are better suited for resolving claims involving unanticipated physical injury, particularly those arising out of an accident. Contract principles, on the other hand, are generally more appropriate for determining claims for consequential damage that the parties have, or could have, addressed in their agreement. Id. at 672. The Court reasoned that "[a]s between commercial parties, . . . the allocation of risks in accordance with their agreement better serves the public interest than an allocation achieved as a matter of policy without reference to that agreement." Id. at 671. Nevertheless, the Court held the economic loss doctrine does not bar tort recovery in every case where the plaintiff suffers economic harm without any attendant physical harm in People Express Airlines, Inc. v. Consolidated Rail Corp., 495 A.2d 107 (N.J. 1985). There, a fire at a railroad freight yard resulted in the evacuation of an adjacent terminal at Newark International Airport. Id. at 108. Employees of the plaintiff, an airline based in the evacuated terminal, could not return to the terminal for twelve hours, causing the plaintiff to suffer economic losses as a result of canceled flights and lost reservations. Id. The plaintiff sued the railroad defendant for negligence, among other causes of action. Id. at 109. After a survey of the economic loss doctrine and its exceptions, the Court articulated how the doctrine operates in New Jersey:

We hold therefore that a defendant owes a duty of care to take reasonable measures to avoid the risk of causing economic damages, aside from physical injury, to particular plaintiffs or plaintiffs comprising an identifiable class with respect to whom defendant knows or has reason to know are likely to suffer such damages from its conduct. . . .

We stress that an identifiable class of plaintiffs is not simply a foreseeable class of plaintiffs. . . . An identifiable class of plaintiffs

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No. 12-20648

must be particularly foreseeable in terms of the type of persons or entities comprising the class, the certainty or predictability of their presence, the approximate numbers of those in the class, as well as the type of economic expectations disrupted.

We recognize that some cases will present circumstances that defy the categorization here devised to circumscribe a defendant's orbit of duty, limit otherwise boundless liability and define an identifiable class of plaintiffs that may recover. In these cases, the courts will be required to draw upon notions of fairness, common sense and morality to fix the line limiting liability as a matter of public policy, rather than an uncritical application of the principle of particular foreseeability. Id. at 116 (internal citations omitted). Accordingly, under New Jersey law, the economic loss doctrine does not bar tort recovery where the defendant causes an identifiable class of plaintiffs to which it owes a duty of care to suffer economic loss that does not result in boundless liability. Id. The parties rely heavily on two federal cases interpreting the economic loss doctrine under New Jersey law. In the first, Dynalectric Co. v. Westinghouse Electric Corp., a contractor, Westinghouse Electric Corporation ("Westinghouse"), sub-contracted work to Dick Corporation ("Dick") and Davy McKee Corporation ("Davy"). 803 F. Supp. 985, 986?87 (D.N.J. 1992). Dick then sub-subcontracted work to Dynalectric Corporation ("Dynalectric"). Id. at 987. Westinghouse and Dick's contract contained an arbitration clause and a procedure for filing claims. Id. Dick and Dynalectric's contract incorporated the terms of Dick's contract with Westinghouse, expressly giving Dynalectric all remedies afforded to Dick by that contract and requiring Dick to submit to Westinghouse any of Dynalectric's claims. Id. Dynalectric suffered economic loss due to actions of Westinghouse and Davy. Id. at 987. Dick filed a demand

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